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C:/ITOOLS/WMS/CUP/386783/WORKINGFOLDER/LYO/9780521886048C08.3D 192 [192–216] 16.6.2009 11:52AM 8 The Orders and Rules of British Horseracing: anticompetitive agreements or good governance of a multi-sided sport? Bruce Lyons 1. Introduction In a sport that is linked with betting and its associated problems, British horseracing is internationally renowned for its quality, diversity and integrity. It is the second most popular sport in Britain, with nearly 6 million spectators watching it live and millions more watching at home, including a TV audience of 10 million for the Grand National each year. Racehorse owners spend £275 million for the excitement of watching their horses race.1 British horse- racing also provides the punter’s favourite bet, leaving bookmakers with a gross win of over £1 billion, 10 per cent of which is put back into the sport. It is a key feature of the competitive analysis that three such diverse sets of consumers (spectators, owners and punters) buy into the same British horseracing product. This is the reason for calling it a multi-sided sport in the title to this chapter. Successful sports are built on strong governance, which is necessary to keep the competition exciting and free from corruption. Sports with weak, frag- mented governance structures tend to lose public interest (e.g. boxing, wres- tling). The fact that British horseracing has had a unified governance structure for over 250 years is undoubtedly one of the contributing factors to its success. As one might expect over such a long period, a fairly lengthy set of regulations has been developed to govern the rules of individual races and the control of race, fixture and commercial rights. These rules and regulations are known as the ‘Orders and Rules of British Horseracing’, some of which were challenged by the UK Office of Fair Trading (OFT) as anticompetitive agreements under Chapter 1 of the Competition Act 1998 (equivalent to Article 81EC). 1 They recover only a third of this in prize money and sponsorship. C:/ITOOLS/WMS/CUP/386783/WORKINGFOLDER/LYO/9780521886048C08.3D 193 [192–216] 16.6.2009 11:52AM 193 8. The Orders and Rules of British Horseracing The competition issues under review in this chapter concern those Orders and Rules which had the effect of creating joint-selling rights in dealing with bookmakers, limiting the rights of individual racecourses to run fixtures whenever they want and restricting relative prize money across races.2 Such issues get to the tension between ensuring good governance and creating cartel-like restrictions. This is where economic analysis is necessary to deter- mine which rules are necessary for good governance and which are not. A recurring theme in this chapter is that good governance in sport requires the appropriate treatment of externalities, which may be either positive (e.g. betting opportunities for bookmakers) or negative (e.g. inappropriate prize money in one race distorting incentives in another). A particularly important network externality is that the pleasure of horseracing for punters depends on the number and quality of horses in training (i.e. the number of owners and how much they spend).3 A famous idea in economics, known as the Coase Theorem, sets out the conditions under which bilateral bargaining can eliminate the inefficiencies associated with externalities. As we shall see, these conditions are unlikely to hold in the absence of certain of the Orders and Rules because property rights would be too fragmented and uncertain and transaction costs would be high. This case illustrates an important lesson for the practical application of competition policy. Restrictive agreements should not be considered exclu- sively from the perspective of their potential to create distortions, because many such agreements have a beneficial, efficiency-enhancing purpose. In such situations, it is necessary to consider the net benefit to consumers and act only against those agreements that are harmful or unnecessarily restrictive.4 More specifically, economists have become increasingly aware that there are important cases where more than one group of consumers gains benefit from the same product. While all such groups have similar interests in being able to buy into a high-quality product (or interface or platform or sport), the structure of prices (i.e. who contributes how much to funding the British horseracing product) can directly affect not only the distribution of benefits but also the design and quality of the product itself. In the case of horseracing, 2 Joint-selling of betting rights is similar to, but as we shall see importantly different from, the sale of media rights. For a short summary of competition issues in the sale of media rights in football, see Hatton et al. (2007). 3 A network externality arises when the value of the product to one consumer depends on the number of others. This is a cross-group externality when the benefit to one group of consumers depends on the number of consumers in another distinct group. 4 A similar point is emphasised by Motta in Chapter 1 and Rey and Venit in Chapter 11. See also EAGCP (2005) for the economic approach to competition policy. C:/ITOOLS/WMS/CUP/386783/WORKINGFOLDER/LYO/9780521886048C08.3D 194 [192–216] 16.6.2009 11:52AM 194 Cases in European Competition Policy: The Economic Analysis a central issue is that a higher price charged to bookmakers for being able to take bets on British horseracing automatically feeds through to a lower price for owners and better quality racing for spectators. The reverse holds if bookmakers contribute less. Careful economic analysis is necessary to identify a benchmark optimum price structure and to understand the consequences of alternative structures for each group of consumers.5 With this last point in mind, section 2 discusses the preferences of the main groups of consumers. Section 3 introduces the roles of some key institutions of British horseracing. Section 4 summarises the statement of objections (known as a ‘Rule 14 Notice’) by the relevant UK competition authority – the Office of Fair Trading. My own economic analysis is set out in section 5. Section 6 summarises the outcome of the case, both in terms of the modernisation of British horseracing and what has happened in various UK and European courts. It also provides a brief conclusion. 2. The consumers of British horseracing6 The aim of competition policy The principal objective of modern competition policy is to ensure that markets operate competitively in the interests of consumers. The OFT sums this up admirably in its mission as stated in successive annual reports and highlighted in its web home page headline: ‘Making markets work well for consumers.’7 The obvious first question to ask is, what are consumers buying? For most sports, it is rarely a single event such as an isolated race or self-standing football match that creates the thrill. The excitement is generated by a sporting competition which links results in different events. In the case of horseracing, there is no major league or knock-out cup, but horses develop their ratings to qualify for more highly rated events. Their form in one race also matters for handicapping in later races which may be run at any racecourse. Furthermore, the integrity of races run under a common governance structure underpins consumer confidence. This suggests a product definition of British horse- racing, not an isolated race or day of racing, but an interlinked programme over the season. We return to this after considering consumers in more detail. 5 See Armstrong and Wright in Chapter 3 and Rochet in Chapter 7 for other examples of competition policy applied to two-sided markets. 6 Many of the figures used in this section can now be found in Deloitte (2006). 7 Emphasis in original. C:/ITOOLS/WMS/CUP/386783/WORKINGFOLDER/LYO/9780521886048C08.3D 195 [192–216] 16.6.2009 11:52AM 195 8. The Orders and Rules of British Horseracing What is the definition of a consumer? Generally speaking, we expect consumers to be the ones who spend money in order to enjoy the product, as distinct from producers who receive income in return for providing the product. This is a fairly straightforward definition for markets with a single category of consumer, but the concept is not so straightforward in a multi- sided market. When different groups of consumers are buying into the same product or ‘platform’ created with a large element of fixed costs, there are many possible ‘prices’ that could generate the same level of funding.8 However, this does not mean that all such sets of prices are equally good because they may affect the quality of the product itself. Put another way, the structure of prices matters. This theme is picked up in section 5. How should the interests of different groups of consumers be weighted? Given the difficulty of making interpersonal comparisons of utility, it seems reasonable to claim that any weights attached to groups of consumers should be non-negatively related to their total spending (i.e. financial contribution to the creation of the product) – those who spend more should not be considered less worthy than those who spend less on the product. For example, it would be inappropriate to consider the effect of a particular rule on bookmakers independently of its effect on owners and spectators. Consumers and consumer preferences At the time of the case in 2003, there were around 9,000 racehorse owners with 13,000 horses in training. It cost around £17,000 p.a. to keep a horse in training and average prize money was only £6,000. The average price of a horse bought at two principal auction firms in Britain in 2005 was £28,000 (Deloitte, 2006).

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